Appropriate use of CbC reports a key concern for MNCs

The potential use of detailed information disclosed in Country-by-Country Reports worries global companies as they call for a fair implementation of the law.Mannu Arora | ETCFO | Updated: August 14, 2018, 12:35 IST

International businesses after making their first compliance with the Country-by-Country (CbC) reporting requirement for financial year 2016-17 in July this year in India are worried about the potential use of the heavily detailed information by tax authorities.

“I think concerns will now come about how the authorities will use the information,” says Srinivasan Vishwanathan, CFO at the Godrej Consumer Products Ltd, who also doubles up as the company secretary.

“The CbC reports have a tabulated format with the number of employees, the total turnover, total income, etc. So it is one number that you put over there,” he adds pointing to the scope for misunderstanding.

The CbCr is a part of the Action 13 of the Base Erosion and Profit Shifting (BEPS) Project of the OECD and G20 countries. The action plan recommends a three-tiered standardized approach requiring large multinationals to provide

information of their global business and transfer pricing policies in a ‘master file’

a detailed transfer pricing documentation specific to each country in a ‘local file’ and

a Country-by-Country Report

The CbC report, to be furnished by a parent entity or any other alternate reporting entity of the international group in its own country, seeks to obtain from the multinational an overview of its income, taxes, and business activities by tax jurisdiction.

The CbC reports have been mandated to be filed within one year of the close of the financial year. Different companies have different deadlines according to the financial calendar they follow.

Deepak Batra, Country Head-India of the Switzerland-headquartered multinational, Evalueserve expects tax authorities not to ‘misuse’ the data.

“We would not like the tax authorities to misuse this data and start questioning the transfer pricing rules. Say, why am I giving a higher markup in any other country and lower markup in India (or similar questions),” he adds.

Transfer pricing is based on the local environment or dynamics, so comparing the markup of one country with another may not be not the right criteria, he points out.

Chandan Agarwal, Head-Tax at Dabur India concurs. The realities of business are governed by market dynamics rather than tax alone. However, often authorities take time to understand this and often such delay can be costly.

“Thus, most companies will not worry about their data (collection), which they duty bound to provide (by law). How the tax authorities will view such information, (however) can pose significant challenges,” he says.

Though at the moment CbC report or master file may not bring immediate challenge for corporates, as the first filings done by July 1 this year will be parsed over time for deeper understanding for the transfer pricing audit.

However, in time when tax authorities will be in position to question legitimate transactions, the usual loop of protracted litigation may play itself out, fears Agarwal.

Nitin Narang, Partner, International Tax and Transfer Pricing at Delhi-based chartered accountancy firm Nangia & Co LLP strikes a similar tone. While it may be that the scrutiny and questions will come after sometime, there may be a “number of interpretational and other issues.”

SMALL COMFORT

What had given a sense of comfort to the professionals is that the Central Board of Direct Taxes, in a circular dated June 27, 2018 had come out with an instruction on the appropriate use of Country-by-Country Reports.

It reiterates that the CbC reports will not be directly accessible to transfer pricing officers though it adds, “the information obtained through CbC reports shall be appropriately used by the TPOs (Transfer Pricing Officers) during transfer pricing audit.”

The information shall be used for high level transfer pricing risk assessment, assessment of other BEPS related risks and economic and statistical analysis, it had further said.

And that the standard operating procedure for the TPO will be formulated by the Centralized Risk Assessment Unit (the CRAU) set up in the office of Director General Risk Assessment, with whom the report is to be filed.

However, as an additional measure most from the finance and legal fraternity say that it would be better, if industry bodies like NASSCOM, CII and others could sensitise the authorities to generic drivers of business, Dabur’s Agarwal says.

Evalueserve’s Batra calls for a more amicable and friendly treatment from the tax authorities. He recommends that if and when authorities find an anomaly in information, they should not just slap a notice on the assessee, but should give them an equal opportunity to defend their case. “If there is some misunderstanding, we should sit together to discuss first,” he says.

In a similar vein, Narang of advisory firm, Nangia Advisors LLP believes that it would help if the tax authorities continue to publish guidance notes from time to time. This would be especially useful before the second round of filing for financial year 2017-18 starts -- November 2018 for the master file and March 2019 for the CbC report, respectively.

Going forward, finance and tax professionals would be no doubt looking for further such clarifications and more guidance from the authorities as they get their ducks in a row for this additional global compliance.